Happy Consumers Could Help These ETFs Charge Higher
By ETF Professor | March 13, 2013 7:54 AM EST
It is well-known that the U.S. consumer accounts for about two-thirds of this country's GDP and it has been cheery consumers that have helped push stocks higher. The Conference Board Consumer ConfidenceIndex bounced back in February to 69.6, from 58.4 in January and there are other encouraging factors worth acknowledging.
"We would characterize the US consumer as reformed, prudently cautious, and view itsfinancial profile as improving," said S&P Capital IQ in a new research note. "We also believe many publicly traded lenders fit the same profile; therefore, we have a positive view on the consumer finance sub-sector."
The consumer finance sub-sector is coming off a stellar run in 2012 when it gained 29.9 percent, according to S&P Capital IQ, easily outperforming the broader market in the process. The group has cooled a bit in 2013, but is still higher year-to-date and S&P Capital IQ does see opportunities with select names.
"In our view, lenders also learned from major lending mistakes pre-crisis," said the research firm. "Lenders tightened up credit standards during the recession through lower loan to value ratios (LTVs), shorter term lengths, higher FICO score requirements, and better overall understanding of the consumer."
One of S&P's top consumer finance picks is Dow component American Express (NYSE: AXP), which the research firm rates with five stars. Among other credit card firms, S&P has three-star ratings on Discover Financial (NYSE: DFS), MasterCard (NYSE: MA) and Visa (NYSE: V).
Among money center banks with significant consumer finance exposure, S&P has four-star ratings on Dow component J.P. Morgan Chase (NYSE: JPM), Citigroup (NYSE: C) and Capital One (NYSE: COF). The research firm is slightly less bullish on Bank of America (NYSE: BAC), US Bancorp (NYSE: USB) and Wells Fargo (NYSE: WFC), rating all those stocks with three stars.
Amid scores of financial services ETFs to choose from, S&P recommends two funds for investors looking to capitalize on continued bullishness in consumer finance stocks. One is the iShares Dow Jones U.S. Financial Sector Index Fund (NYSE: IYF), which S&P rates Overweight.
IYY is home to nearly 260 stocks and over $820 million in assets under management. Seven of the aforementioned stocks are found among the ETF's top-10 holdings. J.P. Morgan is IYF's largest holding with a weight of 6.53 percent. Wells Fargo, Citigroup and Bank of America are also found among the ETF's top-five holdings.
IYF is up 11.5 percent year-to-date and the fund has annual expense ratio of 0.46 percent.
S&P is also bullish on the iShares Dow Jones U.S. Financial Services Index Fund (NYSE: IYG). IYG is smaller than IYF with $484.5 million in AUM, but the former offers a more concentrated bet on the consumer finance theme. Of the aforementioned seven stocks, only Capital One is not a top-10 holding in IYG. That stock is the ETF's number 12 holding.
In terms of being a more concentrated bet on consumer finance stocks, IYG trumps IYF. IYG's top-10 holdings account for over 61 percent of its weight, but IYF's top-10 lineup equals less than 40 percent of that ETF's weight. Combined, J.P. Morgan, Wells Fargo and Citigroup represent about 30 percent of IYG's weight.
Year-to-date, IYG is up nearly 12 percent and also charges an annual expense ratio of 0.46 percent.
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